consumer credit too much or too little (or just right).pdf

Consumer Credit: Too Much or Too Little (or Just Right)? In Preparation for Journal of Legal Studies Special Issue on Benefit-Cost Analysis of Financial Regulation Jonathan Zinman1 Dartmouth College and IPA, J-PAL, NBER February 2014 Abstract The intersection of research and policy on consumer credit often has a Goldilocks feel. Some researchers and policymakers posit that consumer credit markets produce too much credit. Other researchers and policymakers posit that markets produce too little credit. I review theories and evidence on inefficient consumer credit supply. For each of eight classes of theories I sketch some of the leading models and summarize any convincing empirical tests of those models. I also discuss more “circumstantial” evidence that does not map tightly into a particular model but has the potential to shed light on, or obscure, answers to key questions. Overall there is a lack of convincing evidence on whether markets err, and in which direction. We do not yet understand whether and under what conditions markets over-supply or under-supply credit, much less why. Keywords: credit supply, credit demand, lending, asymmetric information, behavioral economics, asset market externalities, microcredit, deleveraging, consumer protection JEL codes: D03,D14,D18,D82,E32,G21,G23,G28,R31 1 jzinman@ . Thanks to Neil Bhutta, Julian Jamison, David Laibson, Jialan Wang, Glenn Weyl, an anonymous referee, and audiences at the Consumer Financial Protection Bureau and the Chicago Benefit-Cost Conference for helpful comments, and to many co-auth